Australian Share Market Outlook

Australian Share Market Outlook

Trying to time investment markets is difficult if not impossible at the best of times, let alone now. The war in Ukraine, rising inflation and interest rates and an upcoming federal election have all added to market uncertainty and volatility.

At times like these investors may be tempted to retreat to the ‘’safety” of cash, but that can be costly. Not only is it difficult to time your exit, but you are also likely to miss out on any upswing that follows a dip.

Take Australian shares. Despite COVID and the recent wall of worries on global markets, Aussie shares soared 64 per cent in the two years from the pandemic low in March 2020 to the end of March 2022.i Who would have thought?

So what lies ahead for shares? The recent Federal Budget contained some clues.

The economic outlook

The Budget doesn’t only outline the government’s spending priorities, it provides a snapshot of where Treasury thinks the Australian economy is headed. While forecasts can be wide of the mark, they do influence market behaviour.

Australia’s economic growth is expected to peak at 4.25 per cent this financial year, underpinned by strong company profits, employment growth and surging commodity prices. Our economy is growing at a faster rate than the global average of 3.75 per cent, and ahead of the US and Europe, which helps explain why Australian shares have performed so strongly.ii

However, growth is expected to taper off to 2.5 per cent by 2023-24, as key commodity prices fall from their current giddy heights by the end of September this year.

Commodity prices have jumped on the back of supply chain disruptions during the pandemic and the war in Ukraine. While much depends on the situation in Ukraine, Treasury estimates that prices for iron ore, oil and coal will all drop sharply later this year.

Share market winners and losers

Rising commodity prices have been a boon for Australia’s resources sector and demand should continue while interest rates remain low and global economies recover from their pandemic lows.

Government spending commitments in the recent Budget will also put extra cash in the pockets of households and the market sectors that depend on them. This is good news for companies in the retail sector, from supermarkets to specialty stores selling discretionary items.

Elsewhere, building supplies, construction and property development companies should benefit from the pipeline of big infrastructure projects combined with support for first home buyers and a strong property market.

Increased Budget spending on defence, and a major investment to improve regional telecommunications, should also flow through to listed companies that supply those sectors as well as the big telcos and internet providers. But there are other influences on the horizon for investors to be aware of.

Rising inflation and interest rates

With inflation on the rise in Australia and the rest of the world, central banks are beginning to lift interest rates from their historic lows. Australia’s Reserve Bank is now expected to start raising rates this year.iii

Global bond markets are already anticipating higher rates, with yields on Australian and US 10-year government bonds jumping to 2.98 per cent and 2.67 per cent respectively.iv

Rising inflation and interest rates can slow economic growth and put a dampener on shares. At the same time, higher interest rates are a cause for celebration for retirees and anyone who depends on income from fixed interest securities and bank deposits. But it’s not that black and white.

While rising interest rates and volatile markets generally constrain returns from shares, some sectors still tend to outperform the market. This includes the banks, because they can charge borrowers more, suppliers and retailers of staples such as food and drink, and healthcare among others.

Putting it all together

In uncertain times when markets are volatile, it’s natural for investors to be a little nervous. But history shows there are investment winners and losers at every point in the economic cycle. At times like these, the best strategy is to have a well-diversified portfolio with a focus on quality.

For share investors, this means quality businesses with stable demand for their goods or services and those able to pass on increased costs to customers.

If you would like to discuss your overall investment strategy don’t hesitate to get in touch.

i https://www.commsec.com.au/market-news/the-markets/2022/mar-22-budget-sharemarket-winners-and-losers.html

ii https://budget.gov.au/2022-23/content/bp1/download/bp1_bs-2.pdf

iii https://www.finder.com.au/rba-survey-4-apr

iv https://tradingeconomics.com/united-states/government-bond-yield

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


How do you take the emotion out of financial decision making?

How do you take the emotion out of financial decision making?

In most walks of life our emotions wield considerable influence over the decisions we make. When it comes to financial decisions, they’re notorious for leading us to act irrationally and derailing our finances. So it’s important to understand how emotions tempt us to make poor financial decisions. Once you can recognise their pull, it becomes that much easier to act rationally. In turn you’ll end up making much better financial decisions.

So where do our feelings about our finances come from? We are the products of our upbringing, learning from and either emulating or rejecting our parents' attitudes to money - but we are also products of our environment. Money equates success in our society and your financial position strongly influences how people treat you, as well as how you perceive yourself, so it’s no wonder that financial matters tend to stir up strong emotions.

While we experience plenty of powerful positive emotions around money - think about how exuberant you feel when you receive an unexpected windfall or win a lucrative contract - it’s the negative emotions we feel about financial matters that really have the potential to impact our decision making.

Let’s look at the most prevalent and powerful feelings associated with money and how to ensure that they don’t adversely impact your financial position.

Fight the fear

One of the most common negative emotions around money is fear. While it’s prudent to be conscious of risk in your approach to financial matters, fear can take the form of avoidance and cause you to miss opportunities. The most successful businesspeople and investors know how to take calculated risks and as we know, risk and reward tend to go hand in hand. The key is to be mindful of your fears but not let them unduly influence your decision making.

The flip side of fear is hope and that’s a powerful motivator that can be channelled into building a successful business or saving for retirement.

Greed is not always good

Greed is another common emotion that can sabotage prudent financial planning. Greed fuels get-rich-quick thinking, making you vulnerable to those that exploit the unwary. Greed can also make it harder to maintain a disciplined, long-term investment plan and makes you prone to risk taking or knee-jerk reactions when the market is volatile.

Greed is not always bad either. It can drive you to chase ambitious goals, but the trick is in knowing when you’ve got enough or reached that goal. Greed makes us raise those goal posts. That’s where having defined plans and measurable benchmarks comes in.

Guilty as charged

Even more dangerous than fear and greed is guilt. While fear and greed are largely fuelled by external factors like the performance of the stock market or your SMSF or super fund, guilt is your internal conscience speaking to you and it can be insidious. People feel financial guilt about nearly everything. Spending too much... or too little, not earning enough or saving enough, or even having more than others - if it has a dollar value, we feel guilty about it. Feeling guilty can be a key factor holding you back from achieving (and enjoying!) business or personal success.

The best way to combat money guilt is to know your triggers, foster a good understanding of where you stand financially and ensure that your fiscal management reflects your values.

Overcoming envy

It’s hard not to compare your financial situation with others. There is an innate tendency to maintain a ‘keeping up with the Joneses’ kind of awareness of the holidays your friends are having or the cars they are buying.

In business you must keep a regular eye on your competitors. It can be disheartening to see that someone is doing much better than you. However, there is always going to be someone more successful. By all means aspire to more, but it’s important not to let envy drive your decisions.

Emotions aren’t intrinsically bad; it’s how we channel and manage them that either has a positive or negative affect on our finances. Developing an awareness of what emotions drive you and what holds you back will help you achieve your version of a prosperous and successful life.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Handling investment uncertainty: How to calm those market jitters

Handling investment uncertainty: How to calm those market jitters

It’s been a rocky start to the year on world markets but that doesn’t mean you should hit the panic button. Staying the course is generally the best course, but that’s easier said than done when there’s a big market fall.

In January markets plunged some 10 per cent but then staged a recovery. That volatile start may well be an indication of how the year pans out.i

The key reasons for this volatility are fear of inflation, the prospect of rising interest rates and pressure on corporate profits. Add to that ongoing concern surrounding COVID-19 and the conflict between Russia and Ukraine, and it is hardly surprising markets are jittery.

But fear and the inevitable corrections in share prices that come with it are all a normal part of market action.

Downward pressures

Rising interest rates and inflation traditionally lead to downward pressure on shares as the improved returns from fixed interest investments start to make them look more attractive. However, it’s worth noting that inflation in Australia is nowhere near the levels in the US where inflation is at a 40-year high of 7.5 per cent. In fact, the Reserve Bank forecasts underlying inflation to grow to just 3.25 per cent in 2022 before dropping to 2.75 per cent next year.ii

Reserve Bank Governor Philip Lowe concedes interest rates may start to rise this year, with many market analysts looking at August. Even so, he doesn’t believe rates will climb higher than 1.5 to 2 per cent. After all, with the size of mortgages growing in line with rising property prices and high household debt to income levels, rates would not have to rise much to have an impact on household finances and spending.iii

Even with rate hikes on the cards, yields on deposits are likely to remain under 1 per cent for the foreseeable future compared with a grossed-up return (after including franking credits) from share dividends of about 5 per cent.iv

The old adage goes that it’s “time in” the market that counts, not “timing” the market. So if you rush to sell stocks because you fear they may fall further, you risk not only turning a paper loss into a real one, but you also risk missing the rebound in prices later on.

Over time, short-term losses tend to iron out. Growth assets such as shares offer higher returns in the long run with higher risk of volatility along the way. The important thing is to have an investment strategy that allows you to sleep at night and stay the course.

Chance to review

A downturn in the market can also present an opportunity to review your portfolio and make sure that it truly reflects your risk profile. Years of bullish performances on sharemarkets may have encouraged some people to take more risks than their profile would normally dictate.

After many years of strong market returns, it’s possible that your portfolio mix is no longer aligned with your investment strategy. You may also want to make sure you are sufficiently diversified across the asset classes to put yourself in the best position for current and future market conditions.

A recent study found that retirees generally have a low tolerance for losses in their retirement savings. Retirees often favour conservative investments to avoid experiencing downturns, but this means they may lose out on strong returns and capital growth when the market rebounds.

Think long term

Over the long term, shares tend to outperform all other asset classes. And even when share prices fall, you are still earning dividends from those shares. Indeed, the lower the price, the higher the yield on your share investments. And it is also worth noting that with Australia’s dividend imputation system, there are also tax advantages with share investments.

For long-term investors, rather than sell your shares in a kneejerk reaction, it might be worthwhile considering buying stocks at lower prices. This allows you to take advantage of dollar cost averaging, by lowering the average price you pay for a particular company’s shares.

Investments are generally for the long term, especially when it comes to your super. Chopping and changing investments in response to short-term market movements is unlikely to deliver the end results you initially planned.

If the current turbulence in world markets has unsettled you, call us to discuss your investment strategy and whether it still reflects your risk profile and long-term objectives.

i https://tradingeconomics.com/stocks

ii https://www.abc.net.au/news/2022-02-02/rba-governor-philip-lowe-press-club-address/100798394

iii https://www.ampcapital.com/au/en/insights-hub/articles/2022/february/the-rba-ends-bond-buying-but-remains-patient-on-rates-we-expect-the-first-rate-hike-in-august?csid=1135474712While

iv https://www.ampcapital.com/au/en/insights-hub/articles/2022/february/the-rba-ends-bond-buying-but-remains-patient-on-rates-we-expect-the-first-rate-hike-in-august?csid=1135474712While

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Market movements & review - February 2022

Market movements & review video - February 2022

Stay up to date with what's happened in Australian markets over the past month.

January is normally a quiet month on the economic scene, but not this year. Inflation and speculation about rising interest rates dominated the month, sending global shares tumbling.

Please get in touch if you’d like assistance with your personal financial situation.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


2021 Year in Review

2021 Year in Review

Two steps forward, one step back: For the second year running, the pandemic was the focus for policy makers, markets, businesses, and individuals alike.

The year began with hopes that the rollout of vaccines would stem the spread of COVID-19 and allow economies to reopen. Instead, most countries were hit by wave after wave of the virus, periodic lockdowns, and ongoing disruption to lives and livelihoods.

Yet there were also positives. Australia’s vaccination rate exceeded all expectations while property and share markets soared. Investors who stayed the course enjoyed double digit returns from their superannuation, with the median growth fund tipped to return more than 12 per cent for the year.i

The big picture

If the pandemic has taught us anything, it is to expect the unexpected as new variants of the coronavirus - first Delta and now Omicron – hampered plans to return to a 'new normal'.

Yet through it all, the global economy picked up steam. In the year to September the two global powerhouses the US and China grew at an annual rate of 4.9 per cent, while the Australian economy grew by 3.9 per cent.

The Australian economy is estimated to have grown by more than 4 per cent in 2021, with unemployment falling to 4.6 per cent ahead of the Christmas rush.

But challenges remain. As global demand for goods and services picked up, ongoing shutdowns disrupted manufacturing and supply chains. The result was higher prices and emerging inflation.

Inflation and interest rates

Australia’s inflation rate jumped from less than one per cent to 3 per cent in 2021. This is lower than the US, where inflation hit 6.8 per cent, but it still led to speculation about interest rate hikes.

The Reserve Bank insists it won’t lift rates until inflation is sustainably between 2-3 per cent, unemployment is closer to 4 per cent and wages growth near 3 per cent. (Wages were up 2.2 per cent in the year to September.) The Reserve doesn’t expect to meet all these conditions until 2023 at the earliest, but many economists think it could be sooner.

While Australia’s cash rate remains at an historic low of 0.1 per cent, bond yields point to higher rates ahead. Australia’s 10-year government bond yields rose from 0.98 per cent to 1.67 per cent in 2021.

Shares continue to shine

Global sharemarkets made some big gains in 2021 on the back of economic recovery and strong corporate profits. The US market led the way, with the S&P500 index up 27 per cent to finish at near record highs.

European stocks also performed well while the Chinese market suffered from the government’s regulatory crackdown and the Evergrande property crisis.

In the middle of the pack, the Australian market rose a solid 13.5 per cent in 2021. The picture is even rosier when dividends are added, taking the total return to 17.7 per cent.ii

Volatile commodity prices

As the global economy geared up, so did demand for raw materials. Commodity prices were generally higher but with some wild swings along the way.

Oil prices rose around 53 per cent, thermal coal prices soared 111 per cent and coking coal rose 37 per cent. Australia’s biggest export, iron ore, fell 25 per cent but only after hitting a record high in May.

Despite demand for our raw materials and a sound economy, the Aussie dollar fell from US77c at the start of the year to finish at US72.5c, providing a welcome boost for Australian exporters.

Property boom

Australia’s residential property market had another bumper year, although the pace of growth shows signs of slowing. National home prices rose 22.1 per cent in 2021, according to CoreLogic. When rental income is included the total return from property was 25.7 per cent.iii

Regional areas (up 25.9 per cent) outpaced capital cities (up 21.0 per cent), as people fled to the perceived safety and affordability of the country during the pandemic. Even so, prices were up in all major cities.

Looking ahead

The pandemic is likely to continue to dominate economic developments in 2022. Much will depend on the supply and efficacy of vaccines to protect against Omicron and any future variants of the coronavirus.

Financial markets will also keenly watch for signs of inflation and rising interest rate. In Australia, inflation is unlikely to be constrained while wages growth remains low, and the Reserve Bank keeps rates on hold.

The wild card is the looming federal election which must be held by May. Until the outcome is known, uncertainty may weigh on markets, households, and business.

i https://www.chantwest.com.au/resources/remarkable-a-10th-consecutive-positive-year

ii https://www.commsec.com.au/content/dam/EN/Campaigns_Native/yearahead/CommSec-Year-In-Review-2022-Report.pdf

iii https://www.corelogic.com.au/news/housing-values-end-year-221-higher-pace-gains-continuing-soften-multi-speed-conditions-emerge

Unless otherwise stated, figures were sourced from Trading Economics on 31/12/21

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Investing on facts not FOMO

Investing on facts not FOMO

Prices for property, cryptocurrencies and shares have all hit records recently. While great news for investors, there’s always a risk that some people will jump into the market because they are afraid of missing out on easy money.

FOMO, or the fear of missing out, has always been around on financial markets, but social media and reality television have taken it to a whole new level.

In the lead-up to the 1929 Wall Street Crash, the saying was that when the shoeshine boy or taxi drivers started giving you share tips, it was a sure sign the market was running ahead of itself. Rather than a signal to buy, it was probably time to bail out or bide your time.

These days, social media has become the new shoeshine boy.

A long history

This fear of missing out goes back even further to the mid-1600s Dutch tulip market bubble. At its height, the cost of the rarest tulip bulb was the equivalent of six times the average wage. People rushed to buy tulips on credit for fear of missing out. Inevitably, the tulip bubble burst, devastating investors and the Dutch economy.

A much more recent example of a market getting overheated was the dotcom boom at the turn of the century when people paid top dollar for shares in companies with no history of profits.

Two decades later, and there are concerns that FOMO may be a factor in the rise of property, shares and cryptocurrencies. Over the past year, Australian house prices have jumped 22 per cent on average and more in some parts of the country.i People are scared that if they don’t get in now, then they will never get a foot on the property ladder.

Global share price to earnings (PE) ratios are also at high levels. Some argue that high prices are justified by low interest rates while others worry that some companies may be valued on an overly optimistic view of future earnings.ii

Cryptocurrencies are complex

But it’s the focus on cryptocurrencies that has some market veterans concerned, not least because these are complex new instruments that are not well understood.

At the end of the day, you should always understand where you are putting your money and how it fits your investment objectives and risk profile. If a big drop in price would keep you awake at night, then crypto may not be for you.

In its typically understated style, the Reserve Bank has warned that “the current speculative demand for cryptocurrencies and their surge in value is likely to reverse”.iii

Meme stocks are also an area of concern. These are companies made popular with retail investors through social media sites like Reddit. Examples include AMC and Gamestop.

They are what used to be called pump-and-dump stocks, popularised in the movie The Wolf of Wall St. The only investors to really benefit are those who got in at the beginning and sold in time to realise their gains; not the ones who bought at the peak of the frenzy.

Think long term

Investments should always reflect your long-term objectives. Jumping from one investment to another just because somebody says it’s a good thing can be dangerous.

In the words of Warren Buffett, it pays to be counterintuitive with the market. Rather than follow the crowd “be fearful when others are greedy and greedy when others are fearful”.

But humans being human, tend to do the opposite and pay the price. It’s an age-old maxim that in the long run, growth assets like shares and property tend to outperform other asset classes. You won’t enjoy those long-term gains if you are buying and selling in reaction to short-term market moves.

That’s not to say you should set and forget your investments. For instance, when the market is booming, it may present an opportunity to realise some of your gains, sell any duds, and reinvest the proceeds when bargains emerge.

If you are considering an investment but unsure about its worth or where it might sit within your overall portfolio, give us a call.

i https://www.corelogic.com.au/sites/default/files/2021-10/211101_CoreLogic_Oct_homevalueindex_Nov1_2021_FINAL.pdf

ii https://www.forbes.com/sites/bradmcmillan/2021/09/20/how-can-we-tell-if-the-market-is-overvalued

iii smh.com.au

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Investing in Australia amidst rising inflation rates

Investing in Australia Amidst Rising Inflation Rates

The Australian economy is heating up, with inflation on the rise. This offers opportunities for investors who understand how to capitalize on this trend. Here's what you need to know.

With rising inflation comes upward pressure on interest rates. This shift impacts how investors should think about their portfolios, especially when it comes to bonds and cash. Also, with regards the good opportunities it creates.

In the September quarter, the consumer price index (CPI) rose 3 per cent year on year, a level previously not forecast to be reached until 2023. The underlying rate of inflation, which removes extreme price changes and is generally considered a more accurate reflection of what is happening on the ground, increased 2.1 per cent on an annual basis.

Now the Reserve Bank of Australia (RBA) is looking at bringing forward interest rate rises in the wake of this growing inflation rate. When it does, it will be the first time in 11 years that the bank has raised interest rates.

This development is highlighted by the RBA’s relaxing and then abandoning its target for the 3-year government bond rate (the benchmark) which it had originally set at 0.10 per cent. By the start of November, the market had pushed this rate above 1 per cent, 10 times the RBA’s original target, effectively forcing its hand.i

The RBA’s stated aim is to keep the inflation rate within its 2-3 per cent target range. But some seasoned market observers are forecasting the rate could get as high as 3 to 5 per cent by 2023, and perhaps a touch higher.ii

So why is this happening now?

Factors behind the rise

There has been a combination of factors leading to the uptick in inflation, mostly resulting from events stemming from the COVID-19 pandemic and the prospect of a recession fading fast.

These influences include cost pressures from global and local supply chain bottlenecks along with higher energy prices, an uptick in rents and rising insurance costs.

A shortage of labour, partly on the back of the absence of migration and casual overseas workers throughout the pandemic, is now also putting pressure on wages.

For some months, there has been debate over whether inflation was just a transitory event in the wake of COVID, but it is beginning to look more permanent as the months go by.

Opportunities for investors

Inflation is not all bad news for investors, but it may change the way you think about your investments.

The low interest rate regime that led to soaring property prices has left many investors with healthy gains in asset prices, adding to their wealth. While the move to higher interest rates may make borrowing money harder and take some of the boom out of the housing market, it is worth remembering the gains made to date are unlikely to be completely wiped out.

But it’s not just property; all major asset classes are highly valued at present.

Rising inflation traditionally erodes the value of bonds and cash. As interest rates move north, the appeal of those bonds offering the current low rates will fall and in turn so will the price.

As a result, it may be worth assessing whether your asset allocation to bonds is still appropriate for your circumstance and long-term goals, as floating rate bonds or inflation linked bonds may be more appropriate.

Quality stocks still attractive

The reduced appeal of longer-term bonds traditionally increases the appeal of equities as a better hedge against rising inflation.

Also, with a once-feared double dip recession now looking unlikely in North America, Europe, China and Japan, many companies are expected to enjoy continued growth in what is still a low interest rate environment.

While sharemarket returns may be more modest than in recent times, many companies still offer potential. Quality companies offering a high return on earnings, a lowly geared balance sheet and the ability to set prices, will continue to provide attractive investment options.

Inflation and interest rates

The challenge with a higher inflation rate is that it could outpace any growth in interest rates, leaving those weighted towards long-term fixed interest investments in a situation where their money is being eroded over time. As the global economy begins to shift gears, now may be the time to consider reviewing your portfolio to reflect the changing conditions.

If you would like to know more about whether your current investment mix is appropriate for your circumstances and the times, please give us a call to discuss.

i https://www.rba.gov.au/media-releases/2021/mr-21-24.html

ii https://theconversation.com/australias-reserve-bank-signals-the-end-of-ultra-cheap-money-heres-what-it-will-mean-170928

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Responsible investing on the rise - a new boom?

Responsible investing on the rise - a new boom?

For many people, there’s much more to choosing investments than focusing exclusively on financial returns. Returns are important, but a growing number of people also want their investments align with their values. Here's what you should know.

Everyone’s values are different but given the choice, most people would wish to make a positive difference to their community and/or the planet. Or at least to do no harm.

Indeed, four out of five Australians believe environmental issues are important when it comes to their investment decisions.i

As a result, there has been a surge in what is called responsible investing. Also known as ethical or sustainable investing, responsible investing includes investments that support and benefit the environment and society, rather than those whose products or way of conducting business have a negative impact on the world.

Millennials driving growth in sustainability

The trend toward responsible investment is growing rapidly. According to the Responsible Investment Association of Australasia (RIAA), Australians invested $1.2 trillion in responsible assets in 2020.ii While money flowing into Australian sustainable investment funds was up an estimated 66 per cent in the year to June 2021.iii

Responsible investing is particularly popular among millennials, now in their late 20s and 30s and beginning to get serious about building wealth. Many in this group are getting a foot on the investment ladder via exchange-traded funds (ETFs). A recent survey of the Australian ETF market found 28 per cent of younger investors had requested more ethical investments.iv

More sustainable investment options

As awareness of responsible investing grows, so does the availability of sustainable investment options, beginning with your super fund.

Most large super funds these days offer a sustainable option on their investment menu. While relatively rare even 10 years ago, the availability and performance of sustainable options has grown strongly over the past three to five years.

According to independent research group, SuperRatings, the top performing sustainable options now surpass their typical balanced style counterparts in some cases.v

If you run your own self-managed super fund (SMSF) or wish to invest outside super, there is a growing number of managed funds that actively select sustainable investments, or ETFs that passively track an index or sector.

There were 135 sustainable funds in Australia and New Zealand in 2021, so there is plenty of choice.iii

How to screen

So how do you find the ethical investments that best suit your values?

There are several methods used with the most common being negative screening. This is where you exclude investments in companies engaged in unwelcomed activities such as gambling, tobacco, firearms, animal cruelty, human rights abuses or fossil fuels.

Positive screening is the opposite, where you actively seek out investments in companies making a positive contribution. Some examples might be companies involved in renewable energy, health care or education.

Another criterion is to look at companies that monitor their environmental, social and governance risks. This cuts across all industries and is more about the way the company conducts its business.

Environmentally they may monitor their carbon emissions or pursue clean technology, socially they may be active in ensuring a safe workplace and on the governance front they may pursue board diversity or anti-corruption policies.

Greenwashing on the rise

As the popularity of responsible investing grows, so do concerns about the practice of so-called greenwashing. This is where a company or fund overrepresents the extent to which its practices live up to their promises. The Australian Securities and Investments Commission (ASIC) recently announced a review into the use of greenwashing in Australia, prompted in part by the demand for such funds.iii

Another trend is impact investing in companies or organisations helping to finance solutions to some of society’s biggest challenges. This might include investments in areas such as affordable housing or sustainable agriculture.

Solid returns

While some investors are driven by their values alone, many more want value for their money. The good news is that it’s possible to have it both ways.

The RIAA survey found super funds that engage in responsible investments outperformed their peers over one, three and five years. Clearly responsible investing is a trend that is gaining momentum, with the financial performance of sustainable investments attracting a wider following.

If you would like to discuss your investment options and how they might fit within your overall portfolio

i https://www.canstar.com.au/investor-hub/ethical-investing/

ii https://responsibleinvestment.org/resources/benchmark-report/

iii https://www.morningstar.com.au/funds/article/australias-sustainable-funds-market-is-growin/214505

iv https://www.betashares.com.au/insights/millennials-on-top-betashares-investment-trends-etf-report-2020/

v https://www.lonsec.com.au/2021/07/21/media-release-stellar-fy21-returns-as-super-funds-deliver-for-their-members/

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


what are franking credits

Franking Credits In Australia: What Are They and How Do They Work?

what are franking credits

Franking Credits In Australia: What Are They and How Do They Work?

Australian shares are popular investments with self-funded retirees and anyone who depends on income from their investments, due in part to the favourable tax treatment of franked dividends.

After falling off in the early days of the COVID pandemic, share prices and dividends bounced back strongly in the year to June 2021.

Investors who depend on income from their shares also have more certainty now that the Labor Party has dropped its opposition to cash refunds of excess franking credits, a policy that attracted fierce resistance from retirees at the last federal election.

The hunt for yield

In a low interest rate environment, dividend yields on Australian shares compare favourably with near-zero interest rates on bank term deposits and historically low yields on government bonds.

Over the past 40 years, the dividend yield on Australian shares has averaged just over four per cent and many stocks pay more, (dividend yield is the sum of dividends over the past 12 months divided by the current share price). In fact, dividends account for roughly half the total return from Australian shares over the past 20 years.i

These dividend yields are even more attractive when the tax benefits of franking credits are included, especially for investors in retirement phase.

What are franking credits?

Franking credits represent tax a company has already paid in Australia on any profits it distributes to shareholders by way of dividends. The company tax rate in Australia is currently 30 per cent, or 25 per cent for companies with turnover of less than $50 million.

Shareholders can then use these franking credits, also known as imputation credits, to offset their tax liability on other income, including salary, at the end of the financial year. People who pay no tax, such as investors in retirement phase, can claim a full tax refund from the ATO.

If your marginal tax rate is less than the company tax rate of 30 per cent, you may be eligible to receive a refund of the difference between the franking credit and your tax payable.

This is one reason SMSFs are so attracted to shares in Australian companies that pay fully franked dividends. Super funds pay a top income tax rate of 15% and no tax on the earnings or income of investments supporting a retirement pension.

Am I eligible for a tax refund?

You may be eligible for a refund of excess franking credits if all the following apply:

• You receive franked dividends on or after 1 July 2000 either directly or through a trust or partnership

• Your basic tax liability is less than your franking credits, after taking into account any other tax offsets you are entitled to.

• You meet the ATO’s anti-avoidance rules, designed to ensure everyone pays their fair share of tax.
You will also need to keep dividend statements from companies that paid franked dividends to support your claims.

So how does franking work?

Franking credits have different impacts depending on your marginal tax rate and whether your share investments are held inside or outside super.

Say you own shares in a company which pays a fully franked dividend of $700. Your dividend statement says there is a franking credit of $300, which represents tax the company has already paid. This means the dividend before company tax was deducted would have been $1,000 ($700 + $300).

In your annual tax return, you must declare the full $1,000 in your taxable income. The after-tax value of the dividend will then depend on your marginal tax rate.

If you hold the shares in an SMSF tax-free pension account, you will receive a total dividend payment of $1,000, $700 dividend plus a full cash refund of the attached franking credits.

If you hold the shares in an SMSF accumulation account (with 15% tax), you will receive $850, $700 dividend plus a $150 cash refund of franking credits.

If you hold the shares in your own name there will be some tax to pay on your dividend income, but significantly less than you would otherwise have paid without franking credits.

If you would like to discuss the taxation of share dividends and the role they play in your overall investment strategy, please give us a call.

i https://www.bt.com.au/personal/smsf/manage-your-smsf/investment-insights/the-search-for-dividend-yield-in-a-low-growth-environment.html

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Investing lessons from the COVID pandemic

Investing lessons from the COVID pandemic

When the coronavirus pandemic hit financial markets in March 2020, almost 40 per cent was wiped off the value of shares in less than a month.i Understandably, many investors hit the panic button and switched to cash or withdrew savings from superannuation.

With the benefit of hindsight, some people may be regretting acting in haste.

As it happened, shares rebounded faster than anyone dared predict. Australian shares rose 28 per cent in the year to June 2020 while global shares rose 37 per cent. Balanced growth super funds returned 18 per cent for the year, their best performance in 24 years.ii

While every financial crisis is different, some investment rules are timeless. So, what are the lessons of the last 18 months?

Lesson #1 Ignore the noise

When markets suffer a major fall as they did last year, the sound can be deafening. From headlines screaming bloodbath, to friends comparing the fall in their super account balance and their dashed retirement hopes.

Yet as we have seen, markets and market sentiment can swing quickly. That’s because on any given day markets don’t just reflect economic fundamentals but the collective mood swings of all the buyers and sellers. In the long run though, the underlying value of investments generally outweighs short-term price fluctuations.

One of the key lessons of the past 18 months is that ignoring the noisy doomsayers and focussing on long-term investing is better for your wealth.

Lesson #2 Stay diversified

Another lesson is the importance of diversification. By spreading your money across and within asset classes you can minimise the risk of one bad investment or short-term fall in one asset class wiping out your savings.

Diversification also helps smooth out your returns in the long run. For example, in the year to June 2020, Australian shares and listed property fell sharply, but positive returns from bonds and cash acted as a buffer reducing the overall loss of balanced growth super funds to 0.5%.

The following 12 months to June 2021 shares and property bounced back strongly, taking returns of balanced growth super funds to 18 per cent. But investors who switched to cash at the depths of the market despair in March last year would have gone backwards after fees and tax.

More importantly, over the past 10 years balanced growth funds have returned 8.6 per cent per year on average after tax and investment fees.ii

The mix of investments you choose will depend on your age and tolerance for risk. The younger you are, the more you can afford to have in more aggressive assets that carry a higher level of risk, such as shares and property to grow your wealth over the long term. But even retirees can benefit from having some of their savings in growth assets to help replenish their nest egg even as they withdraw income.

Lesson #3 Stay the course

The Holy Grail of investing is to buy at the bottom of the market and sell when it peaks. If only it were that easy. Even the most experienced fund managers acknowledge that investors with a balanced portfolio should expect a negative return one year in every five or so.

Even if you had seen the writing on the wall in February 2020 and switched to cash, it’s unlikely you would have switched back into shares in time to catch the full benefit of the upswing that followed.

Timing the market on the way in and the way out is extremely difficult, if not impossible.

Looking ahead

Every new generation of investors has a pivotal experience where lessons are learned. For older investors, it may have been the crash of ’87, the tech wreck of the early 2000s or the global financial crisis. For younger investors and some older ones too, the coronavirus pandemic will be a defining moment in their investing journey.

By choosing an asset allocation that aligns with your age and risk tolerance then staying the course, you can sail through the market highs and lows with your sights firmly set on your investment horizon. Of course, that doesn’t mean you shouldn’t make adjustments or take advantage of opportunities along the way.

We’re here to guide you through the highs and lows of investing, so give us a call if you would like to discuss your investment strategy.

i https://www.forbes.com/sites/lizfrazierpeck/2021/02/11/the-coronavirus-crash-of-2020-and-the-investing-lesson-it-taught-us/?sh=241a03a46cfc

ii https://www.chantwest.com.au/resources/super-funds-post-a-stunning-gain

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.